Monday, June 3, 2013

How a Whiskey Shortage Works

After the recent announcement from Buffalo Trace about a general tightening of bourbon supplies -- a 'shortage,' if you will -- many people chose to comment (here and elsewhere) by pointing out that the stores they shop are still well-supplied with the brands in question.

While this at first blush simply seems funny -- how blinkered is your world view that you don't think something is happening unless it's happening to you? -- it suggests that many people don't understand how a whiskey shortage works.

First, it's important to remember the three-tier system. By law, producers sell to distributors and distributors sell to retailers. In many states, merchandise can't flow in the other direction. Even chain retailers can't move stock from store to store to equalize availability. This can lead to one store in a market being out of a certain product, while others in the same market have plenty.

To a whiskey producer such as Buffalo Trace, there is a shortage whenever they receive orders they can't fill. Sometimes this is a very short term problem. For example, there are no more finished goods in the finished goods warehouse ('finished' means bottled, cased, and ready to ship) and there is a gap in time before that particular product is scheduled for another bottling run, but there is sufficient whiskey available, so that a normal bottling can be done at the next opportunity. That's not really a shortage, although it can result in a few very limited out-of-stock situations at retail.

Another situation might be that the producer's finished goods warehouse is bare and there's nothing suitable that's available to bottle -- so there's a shortage as far as the producer is concerned -- but the distributors have sufficient stock that the shortage never reaches retail. A point is reached where everything is on the shelf somewhere -- the producer and distributor stocks are depleted -- but they are able to be replenished before bare shelves appear at retail.

For the consumer, a real shortage occurs when the finished goods warehouse is bare and there is no suitable whiskey available to bottle until the next batch reaches maturity. For several months, distributors and retailers are unable to replenish their stocks of that particular item, leading to multiple retail out-of-stock situations market-wide. That's the kind of shortage consumers notice, because they may have to visit several stores to find the item in question.

When this happens to a particular product with regularity, because demand has out-stripped supply for several cycles, more consumers are likely to perceive a shortage. Instead of having to visit several stores to find what they want, they can't find it no matter how many stores they visit.

An even more severe situation can occur when there is a gap in the pipeline for some reason. A good example of this is George Dickel. Because the distillery was closed for several years during the 1990s, the pipeline for George Dickel No. 8 simply ran out and there was none to be had anywhere for more than a year. A shortage that severe is very rare.

What's happening now is that general demand has been outstripping supply year after year, even though producers have been increasing supply at the production end of the pipeline. When this happens, producers make such adjustments as they can to ensure that their most profitable products remain available. (Throughout the Dickel 8 shortage, Dickel 12 and Dickel Single Barrel remained generally available.) In this situation, the pipeline may dry up for a particular product, meaning some but never all retailers will experience out-of-stocks, but they're temporary because there's product in the pipeline that simply isn't mature yet.

So if you buy a bottle of brand XYZ approximately every three months, there may be an active shortage but you'll never notice it, because your buying cycle missed the two-month window when out-of-stocks were occurring.

Just because you personally haven't perceived a shortage, that doesn't mean it's not real.

Some producers in the past have hyped shortages. Beam did this a few years ago with Knob Creek. The shortage was real but retail out-of-stocks weren't widespread enough for long enough for most consumers to perceive the shortage personally. Many, therefore, called it a hoax, and that has led them to assume that all announced shortages are also hoaxes, leading to the "we've got plenty here in Little Rock" phenomenon.

Another situation is the deliberate shortage, e.g., Van Winkle. For Van Winkle, Buffalo Trace and the Van Winkle family deliberately keep supply behind demand. At the moment it may be further behind demand than they'd like, but Van Winkle will never be in surplus if the producer can help it. Van Winkle also has legitimate supply issues because the products are so highly aged, meaning they can't make much of a change in supply if they want to, but that doesn't alter the fact that they don't want to.

Consumers, of course, can contribute to a shortage. While some people poo-poo the shortage, others go out and stock up. Some do both.

What bourbon and rye drinkers are likely to experience going forward is occasional, temporary shortages of certain products. If stocking up is advisable at all, you probably won't need more than one or two extra bottles to ride through a brief out-of-stock. Panic buying is certainly not necessary. The best advice is probably to use an out-of-stock when one does occur as an opportunity to try something new.

16 comments:

Van Winkle's deliberate supply shortage is something that the game company Nintendo was accused of back in the 80s and 90s. I suppose usually it is a tactic that largely frowned upon, but when your product is so freaking high in demand, like Van Winkle, who cares?

Richnimrod said;Chuck, that is a very well-explained and cogent explanation that way too many buyers don't always seem to 'get'. A shortage isn't always for a long time, nor always in your particular store at the time you're buying; but a shortage is what it is, and it means someone, somewhere, whether it's a consumer or distributor, isn't able to get what he wants. It doesn't necessarily mean you should rush out and bunker up on some brand.

Man - I've been experiencing a George T Stagg shortage for a long time. I mean - no stores I walk into have any on the shelf (or have had any - in several months)!! Where is CNN, or CBS, or ABC? Why are the news networks trying to sweep this shortage under the rug?? Who cares about Maker's Mark dropping proof to meet supply - I want to know who is working on the Stagg supply! :-)

My guess is that less than 10% of those who stock up during a shortage are enjoyers of the whiskey who intend to meter out small sips over the length of time they expect the shortage to last. Most are simply grabbing up something they feel will make them rich later on and they would never in a million years actually open the whiskey.

I fully agree that a shortage makes a great opportunity to discover new brands. There are so many to choose from, and you might find one you like so much you won't bother with the old favorite even after she returns (metaphor intended).

Stopped by the state store today and thought of this article. I was looking for some specific bourbons and they were out of all of them. Four Roses Yellow Label, Knob Creek and Russell's Reserve. Ended up getting Bulleit.

" many people chose to comment ... that the stores they shop are still well-supplied with the brands in question."C.Cowdry 6.3.13

Exactly my remarks posted in frustrated response to a leading high end California retailer flogging the "shortage" alarm bell for the umpteenth time in its weekly spirits newsletter. That newsletter now uses its bully pulpit to dutifully trumpet the worsening shortage status every week, immediately followed by breathlessly glowing remarks for triple digit priced "exclusive" products purportedly sold as fast as preppers buy discount priced gold bullion.

BTrace uses the word "tightening". Cowdry echoes the lament of "shortage". I see the word scarcity as more applicable, and that a scarcity of supply for retailers. If retailers' concern was a scarcity of demand, I wouldn't have to hear about it because they wouldn't be in business long enough to whine about it in weekly newsletters. And I'd buy their bankruptcy auctioned inventory piecemeal as dusties for a lower price.

Strategically, the better option for retailers is to liberate themselves from the distiller/wholesaler cartel altogether by using the political clout of their greater numbers in unity to champion greater range as well as quantity of licensed distillers. If mobile stills responsibly operated could roll up to the back garage door in the industrial park like mobile bottling plants now do at urban wineries, product surfeit would be the lament a short decade later.

If supply shortage is in fact the critical issue, it's time to be forthright about allocation beyond the individual retailers' clamor as to which SKU is absent from his shelf today. For the diligent spirits shopper, I suggest the relatively inexpensive Pro service at wine-searcher.com to quickly broaden their range of retailer choices. As for myself, an inveterately bunkering hoarder in recovery, I practiced Cowdry's solution before reading it from him, and now resolutely reserve my booze capital outlay for lengthily hunted dusties of strange provenance, only rarely relapsing with a ridiculously overpriced purchase of the most enticing specimen from sponsored spirits tastings.Brand loyalty is for saps.